Department of Labor
September 24, 2015

Page 5

internal costs to clients should be permitted. The annual disclosure
should be simplified to provide a single statement of the costs and
expenses relative to the investment account, without including
revenue sharing payment information to the extent such payments
are not shared with the individual advisor (and which are already
reflected in the costs and expenses disclosed to the client). The
annual disclosure should focus on the direct costs and expenses
incurred by the client in the account during the past year, as a
percentage of the assets for management fees, and as itemized fee
disclosures for other costs. Firms should be permitted to provide
(as they do now) a general description of the revenue sharing
payments that may be paid to the firm, rather than having to disclose
payments at the client account level. To the extent that the DOL
feels that these disclosures are inadequate, coordination with the
SEC and FINRA can help address this concern in a client friendly
manner using existing disclosure requirements as the model.

Disclosure of Policies and Procedures to Mitigate Conflicts

As required under the BICE, firms would be obligated to identify all
applicable conflicts of interest in formulating policies and procedures
reasonably designed to mitigate their impact. This required process should
be effectively integrated with current regulatory requirements and FINRA
initiatives relative to conflicts of interest.>

There were several commentators who discussed their internal processes to
mitigate internal conflicts of interest that impact clients. Others testified
relative to the adoption of a client bill of rights or similar statement to assure
the process of addressing conflicts of interest and disclosures to clients. In
addition to requiring firms to identify conflicts of interest and mitigate these
conflicts to the extent possible, we believe that providing a formalized
disclosure of this process would provide meaningful insight to clients of these
conflicts.

Recommendation: The BICE’s requirement for firms to identify
conflicts of interest when formulating their policies and procedures,
should be coordinated with FINRA to provide a workable solution
addressing both qualified and non-qualified accounts. Firms
should also publish a firm level disclosure document that describes
the process undertaken by the firm to identify conflicts with respect

5 In 2013, FINRA published a Report on Conflicts of Interest. In addition to addressing conflicts of
interest in various forms in the FINRA 2015 Examination Priority letter, FINRA initiated a sweep
examination in August, 2015, looking at the processes that broker/dealers have implement to identify
and mitigate conflicts of interest, in particular relative representative compensation. Integration of
the DOL process with FINRA will provide an integrated process to identify conflicts and mitigate
these conflicts.



Department of Labor
September 24, 2015
Page 8

19% are decided following a hearing on the merits’. Mandatory arbitration is
important for claimants and firms alike to reduce the costs of litigation, while
providing a fair and timely disposition of the claim. FINRA has made significant
changes to their arbitration process, including the elimination of any industry
personnel on arbitration panels and significantly eliminating summary dispositions.
Elimination of mandatory arbitration would be contrary to the above-cited
Congressional intent. Many contracts and agreements that consumers enter into
today, including everything from property and casualty insurance to rental
agreements, provide for mandatory arbitration. The elimination of mandatory
arbitration in this industry would result in forum shopping by the claimants bar,
encouraging claims with weak legal arguments to be heard through arbitration (where
panels are prohibited from making decisions prior to the hearing), leaving those with
adequate legal arguments and strong sentimental arguments to be brought before
juries in state courts.

Recommendation: |The DOL should not address mandatory arbitration.

Effective Date, Enforcement Date and Impact on Existing IRA Accounts

Testimony and comments were provided relative to the 8-month grace period that has
been announced with respect to the implementation of the Proposal and the delayed
applicability date for the BICE provisions. While longer implementation periods
have been provided for other DOL rulemaking projects, such as the 408(b)(2) fee
disclosure requirement where the industry was given two (2) years from the initial
publication date,’ the Proposal with all of its significant complexity, is far more
aggressive in its implementation date.

NPH also strongly believes that the DOL should provide practical guidance on how
the BICE would apply to existing commission-based IRA accounts when the
conditions of the BICE first become applicable. Specifically, the DOL should clarify
that firms have the flexibility to publish and implement the required BICE contract
by negative consent. This would be in the clients’ best interest and allow them to
continue to receive the advice they have come to expect, without a disruption in
business.

Finally, NPH believes that many firms and individual representatives will elect to
move to a level-compensation platform, due to the operational and legal concerns
with the BICE, even with the changes suggested above. Therefore, for many
commission-based accounts where the representative and the firm have been
receiving commissions or trail revenue, it is anticipated that the representative will
present an option to the client, transitioning the client to a fee-based, investment
advisory account with the client’s approval (assuming that the representative is
licensed to serve as an investment adviser representative of the firm).

® Based upon FINRA published statistics as of August 2015.
° The interim final regulation under ERISA Section 408(b)(2) was published on July 16, 2010.
However, the 408(b)(2) disclosure requirement was not actually implemented until July 1, 2012.


Department of Labor
September 24, 2015

Page 4

are in a better position than many other retail broker/dealers, and wonder how
smaller firms will be able to meet these system development challenges.

Recommendation: The BICE disclosure requirements must be
simplified so that it is administratively feasible for firms to generate
the required disclosures, integrated with the current securities
disclosure requirements, and streamlined so that the resulting
disclosures are readily understandable by clients.
Simplify the BICE Disclosure Requirements and Integrate with Current
Disclosures
Any client who currently purchases a mutual fund or annuity, or other product
sold under prospectus or offering documents, receives documents and
materials that outline the costs and expenses associated with the product.
Given the nature of these existing disclosures, the DOL’s transaction
disclosure requirement would in many instances be duplicative for the
investor.

The annual disclosure required under the BICE for the client could potentially
be tied into existing account disclosures, and year-end disclosures could be
enhanced to provide more detailed descriptions of the compensation received
and costs paid on the account. However, there would be significant
operational costs associated with the disclosure of indirect compensation,
such as revenue sharing and ticket charge revenue, for individual accounts,
since this type of disclosure would require detailed calculations in order to
allocate payment amounts at the client account level. These payments are not
shared with the individual advisor and, therefore, these payments do not pose
a conflict at the representative level. For the foregoing reasons, in our view,
the receipt of revenue sharing payments that are not shared with individual
advisors should not trigger enhanced disclosure obligations under the
Proposal.

Similarly, we do not believe that the website disclosure would provide a
worthwhile benefit to clients, when the required costs of development of the
systems is considered. Therefore, we also request that this requirement be
eliminated in favor of existing disclosures and the general descriptions
otherwise recommended.

Recommendation: The transaction disclosure and the website
disclosure should be eliminated in favor of these existing
disclosures, or alternatively new streamlined disclosures explaining

4 NPH agrees with the Comment Letter provided by TIAA-CREF, and their observation that there is
a fundamental difference between the compensation received by the representative making the
recommendation to the client, and revenue that firms may receive from product sponsors and

clearing

operations that is not shared with representatives. See July 20, 2015 TIAA-CREF

Comment Letter, page 40.


Department of Labor
September 24, 2015

Page 6

to their commission-based business, and the processes used by the
firm to attempt to mitigate these conflicts.

Contract Timing, Contract Terms and Warranties.

NPH feels that certain provisions of the BICE unnecessarily impact the
process of meeting with clients, opening accounts and making
recommendations. Other provisions would be unduly onerous and raise
significant concerns for firms relative to class action litigation.

Specifically, with respect to new accounts established after the Proposal is
finalized and implemented, NPH believes that the BICE contract should be
delivered during the account opening process, rather than being delivered
prior to the time at which a recommendation is made. Typically, there may
be several client meetings and discussions relative to different distribution

_ models (such as commission-based products, managed fee based accounts, or

fixed annuity and insurance products) before any decision is made on the type
of account and the underlying investments. Requiring a contract or written
commitment prior to the client’s decision to pursue an account type is
counterintuitive and would result in further complications and confusion,
delaying the investment process.

Similarly, NPH has grave concerns that the broad scope of the warranty
provisions will invite class action litigation over technical, non-substantive
violations of the warranties, resulting in significant litigation and expenses for
firms. We acknowledge that the BICE merely requires the firm to make
certain warranties (e.g., complying with applicable law), and that the
exemptive relief under the BICE is not actually conditioned on the firm’s
honoring its warranties. Nevertheless, it is highly likely that any claimant
alleging that a firm is in breach of its warranties, will also allege that such
breach makes the firm ineligible for the exemptive relief available under the
BICE. Because claimants may be eligible for additional forms of relief by
alleging a violation of ERISA’s prohibited transaction rules (e.g., right of
rescission), claimants may be substantially more likely to assert that the firm
engaged in a non-exempt prohibited transaction by virtue of a technical
breach in the firm’s warranties (whether factually grounded or not),
increasing the likelihood of class action litigation.

Statistically speaking, if a class is certified in state or federal court, the action
almost always settles and claimants counsel receives an award for its legal
fees. In most cases, the impacted clients receives little or nothing from the
settlement. The NPH Firms do not take issue with a client’s right to raise
legitimate concerns, and they routinely work with clients and their

® According to information published by the US Chamber of Commerce Institute for Legal Reform -
“Do Class Actions Benefit Class Members? An Empirical Analysis of Class Actions” by Mayer
Brown LLP.



Department of Labor
September 24, 2015
Page 9

A client transitioning to the fee-based account would receive the benefit of additional
reporting, discretionary management of the account, and the fiduciary standard of
care under the Investment Advisers Act of 1940 (in addition to ERISA), but in many
cases the ongoing costs would be greater for the client. For example, the
representative may have previously recommended A shares in a mutual fund to an
IRA client, where the client effectively pre-paid for advice by paying a front-end
sales load and is now paying a relatively low 12b-1 fee of 25 basis points on an
ongoing basis. If the client were transitioned to a fee-based account, the asset-based
fee for advisory services would undoubtedly be higher than 25 basis points. NPH is
asking that the DOL provide guidance on these conversion situations, as well as
“grandfathering” relief under the prohibited transaction rules.

Recommendation: NPH is requesting a reasonable implementation date of
three (3) years for new accounts and for implementation with existing
accounts. The BICE should also be modified so that, as of the
implementation date for all existing IRA accounts subject to the BICE,
Firms would be allowed to publish and implement the required contract by
negative consent. Additionally, firms should be given “grandfathering”
relief so that they may recommend to clients that they move from a
commission-based account to a fee-based (level-compensation) account
without triggering a prohibited transaction, as long as the compensation
received by the firm for the fee-based account is reasonable based upon the
services provided to the client.

Thank you for consideration of these comments and recommendations.

/ National Planning Holdings, Inc.


4

Gregory P. Cicotte
Chairman

7601 Technology Way

Denver

co

80237

Tel: (303) 488-4343

Fax: (303) 488-4353

greg.cicotte@jackson.com

INVEST Financial Corporation

Investment Centers of America, Inc.

National Planning Corporation

Sil Investments, Inc.

‘Members FINRA, SIPC

National Planning
HOLDINGS, INC.

September 24, 2015

Employee Benefits Security Employee Benefits Security
Administration Administration

Office of Regulations and Interpretations Office of Exemption Determinations
Conflict of Interest Rule, Room N-5655 _U.S. Department of Labor (Attention

U.S. Department of Labor D-11712)

200 Constitution Avenue, NW 200 Constitution Avenue, NW
Room N-5655 Suite 400

Washington, DC 20210 Washington, DC 20210
FILED ELECTRONICALLY

Re: Definition of the Term “Fiduciary;” Conflict of Interest Rule (RIN
1210-AB32)
Proposed Best Interest Contract Exemption (ZRIN 1210-ZA25)

To Whom It May Concern:

National Planning Holdings, Inc. (“NPH”) is filing this letter to provide comments
relative to the Department of Labor’s (“DOL”) notice of proposed rulemaking
concerning the Definition of the term “fiduciary” of an employee benefit plan (the
“Proposed Regulation”) and the proposed Best Interest Contract Exemption (the
“BICE”) (collectively, the “Proposal”). NPH owns four retail firms (the “NPH
Firms”) operating as registered securities broker/dealers and investment advisers, as
well as insurance agencies, and is an affiliate of Jackson National Life Insurance
Company! (“Jackson”). While NPH did not originally file a comment letter, several
concerns with the Proposal as it impacts NPH were included in Jackson’s original
comment letter. Based upon the testimony on the Proposal and the nature of the
comments filed in writing, NPH felt that it was imperative to provide additional input
and recommendations, separate from those of Jackson.

The NPH Firms are INVEST Financial Corporation, Investment Centers of America,
Inc., National Planning Corporation, and SII Investments, Inc. Collectively, the NPH
Firms have 3,480 registered representatives (as of December 31, 2014), striving to
meet the investment needs of their clients, for both tax-advantaged plan and IRA
accounts (“qualified accounts”) and taxable accounts (“non-qualified accounts”).
NPH and Jackson are wholly owned by Prudential ple (NYSE: PUK), a company
incorporated in England and Wales. Prudential ple is not affiliated in any manner
with Prudential Financial, Inc., a company whose principal place of business is in the
United States of America. The NPH Firms are active in the industry and are proud

+ Jackson National Life Insurance Company is a stock life insurance company organized under the
laws of the state of Michigan since 1961.

www.natplan.com


Department of Labor
September 24, 2015
Page 7

representatives in the event a concern is raised with respect to their client
accounts. However, the Proposal would create a class of similarly situated
clients covered by substantially similar contracts, and claimants counsel may
attempt to use technical violations of the contract and ERISA’s prohibited
transaction rules to turn what would otherwise be a frivolous case into a
certified class action.

Recommendation: To the extent that the DOL retains the contract
requirement, modify the timing of the contract so that the execution
of the required contract at account opening for new accounts would
be sufficient, rather than requiring execution of the contract prior
to the time any recommendation is made. The BICE should also be
modified so that the warranty provisions include a materiality
threshold to avoid claims of technical violations without a showing
that the firm caused substantive client harm.

DOL Interpretive Bulletin 96-1 and Client Education

Like many within the industry, we believe that the proposed modifications to
Interpretive Bulletin 96-1 would be unduly restrictive, and would not further client
interests. The majority of the Title I ERISA clients advised by the NPH Firms,
including 401 (k) plan clients, are in commission-based accounts, typically with group
annuities or mutual fund investments. We believe that both group annuities and
mutual fund platforms can offer cost effective investment solutions for these plans.
In general, as an operational practice, NPH prohibits its representatives from
providing fiduciary advice to plan participants, but allows representatives to provide
education in accordance with Interpretive Bulletin 96-1. In order to effectively
provide education and meet the clients’ needs, and consistent with years of past
practice, we need the ability to identify and discuss the various investment options
that are available under the plan, so that we can provide educational guidance on such
options and help participants make informed investment decisions.

Recommendation: Interpretive Bulletin 96-1 should be retained in its
current form.

FINRA Arbitration is an Appropriate Dispute Resolution Forum

Several witnesses urged the DOL to prohibit mandatory FINRA arbitration, alleging
that it was an inappropriate or conflicted dispute resolution forum. We strongly
disagree. Arbitration provides a cost-effective process to resolve disputes,
recognized by Congress and the US Supreme Court as a proper and preferred dispute
resolution process.’ Statistics maintained by FINRA also show that the majority of
claims brought in FINRA arbitration are settled voluntarily by the claimants, and only

7 See the Federal Arbitration Act, 9 USC Section 2. The Federal Arbitration Act reflects a “liberal
federal policy favoring arbitration.” AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1745
(2011).



Department of Labor
September 24, 2015
Page 2

supporters of the work provided by the Financial Services Institute (“FSI”) and other
industry groups in their efforts to provide insight on the potential adverse impacts of
the Proposal.

Best Interest Standard

Like most of the firms and individuals who provided comments and testimony,
including Jackson, the NPH and the NPH Firms support a best interest standard for
interaction with clients. We believe that a workable best interest standard, whether
phrased as a fiduciary duty or otherwise, is in the best interest of our clients and the
industry in general. However, this standard needs to take into account other
regulatory structures and attempt to address factors that may adversely impact clients,
or unduly impact the industry.

Recommendation: The best interest standard needs to be realistic and
workable. It should also take into account years of common-law and
statutory developments relative to prudent investor standards, rather than
attempting to develop new and undefined standards.

Coordination with Securities Regulators

In watching those invited to submit their testimony, it is clear that there are passionate
and well-intended individuals in support of, and in opposition to, the Proposal in its
current form. In viewing the testimony of the individuals supporting the Proposal,
and their rationale and observations in support of the Proposal (whether you believe
their statements are correct or not), one may reasonably assume that they would
support reform that addresses both qualified and ‘non-qualified accounts in a similar
fashion. As has been expressed by FSI and other commentators, the Proposal would
result in multiple regulatory standards depending upon whether the account in
question is qualified or non-qualified, and whether the services are provided by a firm
acting as a securities broker/dealer, an investment adviser, or an insurance agency for
fixed annuity and insurance products. The resulting confusion, especially for clients
of firms, is a significant concern. Every individual and entity with an interest in this
matter, whether pro or con, should support a common and consistent standard for all
clients, regardless of whether their account is a qualified account or not.

Recommendation: We urge the DOL to work with the Securities and
Exchange Commission (“SEC”) and the Financial Industry Regulatory
Authority, Inc. (“FINRA”) to provide this common and consistent standard.

Best Interest Contractual Exemption (“BICE”)

NPH and the NPH Firms appreciate the willingness of the DOL to propose a new
administrative exemption under the prohibit transaction rules, which would allow the
continued receipt of commissions and other differential compensation by retail
broker/dealers. However, we have significant concerns relative to the workability of
the BICE as proposed. Changes need to be made to the BICE to allow firms to
continue to service clients in a responsible manner, while complying with the newly



Department of Labor
September 24, 2015
Page 3

proposed best interest standard and adopting newly required policies and procedures
designed to mitigate the conflicts of interest that arise from their longstanding
compensation structures.

The importance of a workable BICE cannot be overstated. As noted in the FINRA
comment letter, 98% of IRAs with less than $25,000 in assets are in commission-
based brokerage accounts, citing the April 2011 Oliver Wyman Study, We agree
with FINRA’s observation that these are typically “buy and hold” customers, and we
also believe that they may often involve dollar-cost average investments, requiring
access to mutual funds or annuities to meet their objectives. Therefore, the BICE
exemption needs to be workable for these existing accounts, and similar small
accounts that will be opened in the future, which in either case will need access to
lower-cost, commission-based products. If a workable commission-based option is
not available for these small accounts, the clients will necessarily have to pay more
to gain access to investments as well as valuable investment support.

With respect to the BICE, NPH and the NPH Firms are making the following specific
recommendations:

Disclosures and Information Technology (IT) Systems Requirements

As noted by FINRA, the Department should streamline the applicable PTEs
(including the BICE) “eliminating those conditions that do not incrementally
address the conflicts of interest at issue in a meaningful fashion.”? This
statement is most applicable to the detailed disclosure requirements built into
the BICE in its current form. A significant number of comments were
provided by the investment industry relative to the incredible expense to build
systems (that do not exist today) and to gather the data necessary to meet the
three client disclosure requirements provided in the BICE as follows: (i) the
transaction disclosure required prior to the execution of investment purchases,
(ii) the annual disclosure, and (iii) the website disclosure. We do not intend
to recite these concerns in detail, which were also addressed in Jackson’s
original letter. Simply put, even with the significant resources available, NPH
and the NPH Firms would not be able to come even close to covering the cost
of the required systems using its existing IT budget. Based on reasonable
estimates provided by IT professionals, the one-time cost to develop systems
designed to generate the required disclosures would be a multiple of our
annual IT budget for the entire controlled group. Even then, there is no
guarantee that NPH would be able to meet all technical requirements of the
BICE. Once the systems are built, we would also need the underlying
required data from the product sponsors or through third party suppliers.
Since we share IT development resources with Jackson, we believe that we

? See July 17, 2015 FINRA Comment Letter, page 5.
3 See FINRA Comment Letter, page 19.